OSIM International: 2Q11 results driven by strong earnings growth (OCBC)

2Q11 earnings within expectations. OSIM International Ltd (OSIM) reported its 2Q11 results with revenue increasing 6.0% YoY to S$138.6m, thanks to broad based sales growth from the launch of new innovative products. We are further encouraged by the YoY increase in revenue recorded despite the conversion of GNC Australia into franchised outlets from 3Q10 which led to lower sales recognition. Net profit accelerated 55.3% YoY to S$18.8m. Sequentially, revenue fell 6.9% while bottom-line declined 6.8%. While sales missed our forecast by 10.1%, net profit was within expectations, or 2.2% higher than our projection of S$18.4 due to betterthan-expected margins. 1H11 revenue of S$287.4m (+10.8%) and net profit of S$38.9mm (+93.2%) met 46.3% and 51.7% of our full-year estimates respectively. As expected, an interim dividend of 1 S cent per share was declared (total of 2 S cents YTD).

Pipeline of products to underpin growth momentum. During the quarter, OSIM managed to boost its operating margin and net margin by 6.3 ppt and 4.3 ppt to 17.8% and 13.5% respectively on a YoY basis. This was attributed to improved operating efficiencies and better product mix as OSIM continued to launch new innovative products with improved designs and functionality. Moving forward, management has reiterated its strong focus on innovation with a pipeline of products to be launched in the coming months. We believe that this will improve OSIM's competitive positioning, underpinned by its strategic marketing campaign over the years to build a strong brand equity.

Prospects remain sound albeit macroeconomic uncertainty. We believe that OSIM's growth story remains intact as it drives its earnings traction with new innovative products and a diversified portfolio of specialty brands, coupled with its continuous efforts to raise productivity per outlet and per man. OSIM also incorporated OSIM-TWG Tea (North Asia) during the quarter and is targeting to open its first salon in the IFC Mall in Hong Kong by end-Nov. Its Taiwan TDR approval period has also been extended by three months to 28 Oct 2011. We do not expect OSIM's expansion plans to be affected even if the TDR listing does not take place, given its strong net cash position. Taking into account the latest results, we tweak our FY11/FY12 revenue forecast downwards by 4.9/3.8% but are largely retaining our earnings forecast on higher margins assumptions. Notwithstanding the growth prospects of the group, we now value OSIM based on 20x blended FY11/FY12F EPS (previously 22x FY11F EPS) in light of increasing macroeconomic uncertainty and persistent inflationary pressures in China. Consequently, our fair value estimate declines marginally to S$2.04 (previously S$2.08). Maintain BUY.